Let me try to reformulate the thesis of my book in the light of recent developments.

Since the 1970s we have been in a period of transition to a new paradigm of monetary policy. Governments have tried various approaches to the challenges of managing money: in the 1970s, they put full employment top, and used monetary policies to expand demand, taking risks with inflation; the result was high inflation, high debts, the Third World debt crisis, and, eventually, high unemployment. The 1980s saw a backlash as popular discontent with high inflation made policy makers give priority to price stability; this led the way to inflation targeting (IT) and central bank independence (CBI). After meeting with apparent success in The Great Moderation, the 2008 crash showed this policy model was also deficient. Since then reforms have focussed on strengthening bank capital but the basic framework of the system – IT + CBI with flexible exchange rates – continues.

This period has culminated in some of the biggest experiments ever – a massive expansion of central bank balance sheets, official interest rates held near zero for several years and in some cases deliberate currency depreciation in an effort to spur growth.

“Easy monetary policies not only are unlikely to achieve their desired objectives, but their unintended consequences are becoming increasingly evident, too. There are sharp declines in productivity growth almost everywhere, along with a slowdown in the formation of new businesses. It is not implausible that easy money has encouraged the “ever-greening” of zombie companies by “zombie banks”. Moreover, the prices of almost all assets, whether financial or in property, have been bid up in many countries to levels that heighten the prospect of severe future losses. Who will suffer and what might be the systemic implications? We simply do not know. Monetary policy has led us into truly unchartered territory.”

Bill White locates the fault as a failure to understand the way economies work as “complex, adaptive systems”. We are stuck with the wrong paradigm

In The Money Trap I stuck my neck out by offering a different diagnosis: behind the flawed approach to monetary policy was a false concept of the nature of money itself – hence it is a money trap rather than merely a debt trap.

To recap: Governments are evidently imprisoned in a cage from which they can see no way out. Indeed, there is no way out while they remain under the illusion that they can achieve their objectives by fiddling with monetary levers. Whatever form the central bank doctrine takes, whether reinforced by regulatory powers or whatnot, and whatever rules or objectives central banks follow, make no essential difference: they fail to achieve their ends; economies remain unstable, financial systems fragile. Public trust is lacking. Popular discontent and anger rumbles on dangerously.

A mistaken concept of money

And the key error? It lies in the concept of money as a tool at the disposal of national governments to do what they like with. It is seen as a thing, a stuff that “circulates”. People’s behaviour when they receive this stuff should be predictable, and they should spend a proportion of it. Money becomes an attribute of official control of society rather than a means by which society controls its officials. It is portrayed as a feature of national sovereignty and monetary policy is viewed as an exercise in national monetary autonomy.

Economists and governments realised there was something wrong with this concept of money when they gave central banks independence (CBI). But that did not go nearly far enough. CBI meant central banks adopted certain rules, and were set various objectives, with instructions to manipulate money to achieve those ends.

But while recognising that governments needed to distance themselves from day-to-day operations, that new approach perpetuated the false view of money. The image they wanted us to accept was of wise guardians setting the dials at just the right levels for money and people to behave in the desired way.

Enough is enough

Having watched central banks, led by honourable people (I have known many governors and senior central bankers personally), trying and failing to achieve their goals for nearly 50 years, I conclude it is not going to work.

True, it could have been even worse. To that extent, they deserve credit. Yet even so, there is a growing sense that they are holding back the floodwaters, that their efforts could be storing up worse trouble for the future. There is little confidence in the maintenance of financial stability. Banking could be in secular decline. Yet current policies depend on banks, so they are propped up.

“What we do know is that the health of many financial institutions is now under threat. Bank profits, needed for capital accumulation, are being reduced by low credit and term spreads. Pension funds and insurance companies are threatened even more.”

What money is, and what it is not

The beginning of wisdom is to recognise the trap for what it is. Money is not the kind of stuff people have been trained to think it is. Money is a network of promises, built on trust. As Geoffrey Ingham has shown, it grows out of social relations, including power relations, and derives value from those relations.The state certainly has a large role to play, but money is always a joint venture between the state and society.

Please see next two stories, “Mistreating Money” And “Status Quo or needed reforms?”. For more on Geoffrey Ingham, see here